Sara Lee 2011 Annual Report Download - page 71

68/69 Sara Lee Corporation and Subsidiaries
Leases The corporation has numerous operating leases for manufacturing facilities, warehouses, office space, vehicles and machinery and equipment. Operating lease obligations are sched- uled to be paid as follows: $58 million in 2012, $43 million in 2013, $31 million in 2014, $25 million in 2015, $17 million in 2016 and $69 million thereafter. The corporation is also contingently liable for certain long-term leases on property operated by others. These leased properties relate to certain businesses that have been sold. The corporation continues to be liable for the remaining terms of the leases on these properties in the event that the owners of the businesses are unable to satisfy the lease liability. The minimum annual rentals under these leases are as follows: $15 million in 2012, $11 million in 2013, $10 million in 2014, $8 million in 2015, $2 million in 2016 and $28 million thereafter. Future Contractual Obligations and Commitments During 2007, the corporation exited a U.S. meat production plant that included a hog slaughtering operation. Certain purchase contracts for the purchase of live hogs at this facility were not exited or transferred after the closure of the facility. Under the terms of these contracts, which are open through June 2012, the corporation will continue to purchase these live hogs and therefore, the corporation has entered into a hog sales contract under which these hogs will be sold to another slaughter operator. The corporation’s purchase price of these hogs is generally based on the price of corn products, and the corporation’s selling price for these hogs is generally based on USDA posted hog prices. Divergent movements in these indices will result in either gains or losses on these hog transactions. Expected losses from the sale of these hogs are recognized when the loss is probable of occurring. At the end of 2011, based on current market pricing, the corporation deemed that it was not probable that material future near-term losses would occur. The contractual commitment for these purchases is included in the table below.
The corporation has no material unconditional purchase
obligations as defined by the accounting principles associated with the Disclosure of Long-Term Purchase Obligations. The following table aggregates information on the corporation’s contractual obligations and commitments:
The corporation’s credit ratings by Standard & Poor’s, Moody’s
Investors Service and FitchRatings, as of July 2, 2011, were as follows.
Senior
Unsecured Short-term
Obligations Borrowings Outlook
Standard & Poor’s BBB A-2 Stable Moody’s Baa1 P-2 Negative FitchRatings BBB F-2 Stable
In January 2011, Moody’s Investor Services placed the company’s
long-term rating under review for possible downgrade, likely limited to one notch. It also affirmed the company’s P-2 rating on short- term borrowings.
Changes in the corporation’s credit ratings result in changes in
the corporation’s borrowing costs. The corporation’s current short- term credit rating allows it to participate in a commercial paper market that has a number of potential investors and a historically high degree of liquidity. A downgrade of the corporation’s short-term credit rating would place the corporation in a commercial paper market that would contain significantly less market liquidity than it currently operates in with a rating of “A-2,” “P-2,” or “F-2.” This would reduce the amount of commercial paper the corporation could issue and raise its commercial paper borrowing cost and would require immediate payment or the posting of collateral on the derivative instruments in net liability positions in accordance with ISDA rules. See Note 15, “Financial Instruments” for more information. To the extent that the corporation’s operating requirements were to exceed its ability to issue commercial paper following a downgrade of its short-term credit rating, the corporation has the ability to use avail- able credit facilities to satisfy operating requirements, if necessary. Off-Balance Sheet Arrangements The off-balance sheet arrangements that are reasonably likely to have a current or future effect on the corporation’s financial condition are lease transactions for facilities, warehouses, office space, vehicles and machinery and equipment.